A federal district court ruled two weeks ago that damage to a dwelling from a sewage overflow was limited under a homeowners policy in Durrett v. Nationwide Prop. and Cas. Ins. Co., No. A-14-CA-167-SS, 2015 WL 1564783 (W.D. Tex. Apr. 6, 2015). The dispute began when Keith Durrett, a homeowner who held a policy with Nationwide Insurance, contacted his municipal utility district (KMUD) because of sewage water entering his home.  Durrett contracted with ServPro to pump water out of the house, during which a Nationwide adjuster was present.  The next day, a KMUD representative came to the property and replaced a street-level check valve that was partially responsible for the overflow.

The Nationwide Policy contained an exclusion for damage caused by "(2) water or water-borne material which...(a) backs up through sewers or drains from outside the dwelling's plumbing system."  The Durretts had also purchased additional optional coverage, which included "up to a maximum of five (5) percent of the Coverage A [$168,000]...for direct damage to covered property caused by or resulting from water or waterborne material which: 1. backs up through the sewers or drains from outside the dwelling's plumbing system; or 2. overflows from a sump pup, sump pump well or other system designed to remove subsurface water or water-borne material from the foundation area."  Finding that both the main exclusion and the option coverage provision applied, the adjuster issued the optional coverage limit of $8,595 to the Durretts.  The Durretts disagreed, reasoning that since their contractor ServPro was able to pump all the water out of the house into a storage tank and an employee of the city replaced the street-level valve the next day when the interior leaking had already stopped, the leak was caused by the dwelling's plumbing system and the exclusion therefore did not apply. In response to this disagreement, the Nationwide adjuster retained an engineer to perform a reinspection. The engineer concluded that the sewer backup was caused by two concurrent failures: a failed coupling located within the dwelling and a failed check valve outside the premises. Based on these findings, Nationwide again determined that the policy's optional coverage provision limited payment to 5% of the entire dwelling limit.

The Durretts filed suit against Nationwide in Llano County state court and Nationwide removed to the District Court for the Western District of Texas.  The substance of the Durretts' argument was that the exclusion at issue depended on the location of the plumbing failure (i.e. whether it occurred inside or outside the dwelling).  In interpreting the relevant policy provision, the Court concluded that coverage did not depend on where the plumbing failure occurred, but turned instead on whether the water came from outside the dwelling's plumbing system.  The only admissible evidence in the record was the affidavit of Nationwide's adjuster, who testified that the damage had resulted from a back-flow of city sewer water that then entered the dwelling's plumbing, and that this back-flow was concurrently caused by the failure of a street-level valve and a coupling that was part of the dwelling's plumbing system.  The Court found this evidence placed the damage squarely within the exclusion and optional-coverage limit.  The Court also rejected as unsupported by any evidence the argument by the Durretts' attorney that the sudden-and-accidental-discharge provision applied because the water had in fact leaked from a water-storage unit attached to the dwelling.  Finally, the Court rejected the Durrett's argument claiming some allegedly conflicting statements made by the adjuster during claims handling should affect the meaning of the policy language, finding these statements hearsay and stating that coverage determinations turn on the plain language of the policy, not on any contrary interpretation by Nationwide or its adjusters.

Finding that Nationwide had correctly applied the optional-coverage limit, the Court granted summary judgment in favor of Nationwide on the Durretts' breach-of-contract cause of action and their extra-contractual claims of bad faith and violations of the Texas Insurance Code and the Deceptive Trade Practices Act.

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